Bill Gates masterminded Microsoft's $8.5B USD purchase of Skype. A fund closely affiliated with Mr. Gates, Silver Lake Partners made $2.9B USD off the purchase. But an inside source reveals to us that Mr. Gates had no stake in the fund branch that purchased Skype. Thus despite his large investment in Silver Lake Partners he will receive no compensation from the deal. (Source: UPI)

Bill Gates has been portrayed in pop culture as a ruthless negotiator. (Source: Matt Groening/20th Century Fox)

Fellow Silver Lake investors win big, but Bill Gates earns nothing

Those
following the world of finance might have paused and wondered why Microsoft
would pay $8.5B USD to buy Skype, when many experts
valued the company at less than half of that amount.

Well it turns out a lot of the pressure to buy Skype originated from Microsoft
founder and tech icon Bill Gates.

We were the first to note Mr. Gate's ties to Silver Lake Partners, one of the principle groups that profited from the Skype acquisition.

We can now confirm with strong accuracy that Mr. Gates' funds were not involved in the acquisition, despite Mr. Gates' deep involvement in a earlier Silver Lake Partners fund.

I. Bill Gates Says he Masterminded Acquisition

Bill Gates may have stepped down from the position of CEO of the world's
largest software company Microsoft Corp. (MSFT),
but apparently he still calls the shots at the company he co-founded. Mr.
Gates, a major Microsoft shareholder and Chairman of the company's investor
board, sounded off in an interview with UK news agency BBC News, in
which he said that he was a driving force behind Microsoft's $8.5B USD
acquisition of Skype.

The acquisition shocked many, as the price was almost double some experts'
valuations and came seemingly out of the blue. Some perceive the purchase
as a sign that Microsoft is growing concerned with public interest in rival
Google Inc.'s Google Voice service.

In an interview with BBC reporter
Stephen Sackur, Mr. Gates gives confirmation that the deal was obstensibly a
strategic one. He states, "I think it's a great, great deal for
Skype. I think it's a great deal for Microsoft."

"The idea of video conferencing is going to get so much better than it is
today. Skype actually does get a fair bit of revenue," he adds,
"It'll be fascinating to see how the brilliant ideas out of Microsoft
research, coming together with Skype, what they can make of that."

And he reveals that he promoted the acquisition, stating, "I was a
strong proponent at the board level for the deal being done."

II. Sale a Big Payday for Some Silver Lake Partners Investors -- But Not Mr. Gates

Compelled by that question we discovered an intriguing connection. Mr. Gates had close ties to to one of the funds that purchased Skype.

Skype, Inc. was founded in 2003 by Niklas Zennström from Sweden and Janus Friis
from Denmark. The service's key developers were well known for authoring
the infamous peer-to-peer filesharing client Kazaa. In September 2005
eBay, Inc. (EBAY)
purchased Skype for $2.5B USD, a handsome payday for its European founders.

But Skype proved a poor fit for
eBay, whose core offerings were its titular auctions website and the popular
billing service PayPal, which it gained through a separate prior acquisition.
Skype was the odd man out.

Leading the group of investors was Silver Lake Partners, who poured $940M USD
into it, and reportedly stand to make $2.9B USD off the Microsoft purchase.

But Bill Gates was no stranger to Silver Lake -- in fact he was one of its principal investors. Mr. Gates, along with Oracle Corp. (ORCL)
CEO Larry Ellison and Dell Inc. (DELL)
CEO Michael Dell, helped to pour over $2.3B USD into Silver Lake in 1999 [press release].

Initially it appeared that Mr. Gates might have had money tied to the Silver Lake Partners fund that owned a major share of Skype and thus might be in line for a piece windfall profits from the deal.

However, a source close to Silver Lake Partners has confirmed to us that Mr. Gates was not invested in the fund that purchased Skype.

The source tells us that Silver Lake Partners is primarily funded by blue chip investors with large amounts of venture capital -- such as Mr. Gates. The fund also has taken on some capital from pension funds. The funds' structure is not immediately revealed to outside parties, but the source tells us that each major round of venture capital corresponded to discrete assets purchases.

Mr. Gates was involved in the first round of funding, known as the Silver Lake 1 fund. The Skype purchase was made from a third round of funding, dubbed Silver Lake 3, which Mr. Gates was not a part of. The source would not comment on fund mixing other than to state explicitly that the Silver Lake 1 and Silver Lake 3 funds were not mixed.

Silver Lake Partners refused to comment regarding the investors involved in particular funds or the fund structure, stating that they normally do not reveal who contributes to their funds to protect their clients' privacy.

But our trusted source confirms that Mr. Gates had no financial stake in Silver Lake 3, and thus will not stand to profit from sale, despite his close ties to the fund and major investment in Silver Lake 1.

Mr. Gates has seemed bearish on Microsoft over
the last year. In the last year he sold over 90 million shares of Microsoft stock,
cutting his holdings in the company by 13 percent. The recent selling has concerned some Microsoft investors. However, Mr. Gates, in his comments, remains optimistic about the future of the company he founded. And he clearly seems to think that the Skype deal improved Microsoft, even if the deal may rub some analysts the wrong way.

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quote: Bill Gates was one of the investors in the 2.3B first Silverlake Fund in 1999. Silver Lake Partners II was raised in 2004 with 3.6B, and in 2007 Silver Lake Partners III raised $9.6B in capital.

Do you know which of the Silverlake funds was the lead investor in Skype, or if it was a mix what the distribution was?

No, I don't. But hopefully that will be revealed in weeks to come.

Again, even if Gates is the lead investor, he didn't necessarily do anything wrong, it just will look odd, given that he's been dumping MSFT shares and that the Skype purchase price was quite high (though admittedly, the company was an attractive strategic target).

Even if Gates had initially invested $1B USD and had the majority of that sunk into Skype (one of Silver Lake Partner's biggest properties), that would still only be a small chunk of his sizable fortune (though a lot of that fortune is "stuck" in MSFT shares and isn't very liquid...).

Bear in mind that Sokol is worth at least $150M USD, possibly much more (that's just from his direct payments from Berkshire Hathaway). Yet he embarassed himself and potentially landed himself as the subject of an SEC inquiry for a profit on Lubrizol totaling around $3M USD.

Did that money make much of a difference to his fortune? No.

Did he willfully deceive? It looks like it based on all the media coverage, but who knows...

It could prove a similar story here, depending on how the numbers fall, but UNTIL THEY DO, it's important to reserve judgement and merely take note of this in interest....

I disagree. You may say that it's important to reserve judgement and merely note this with interest, but when I look at DT's main page I see the following.1) A picture from a movie of a man standing on a pile of money with the heading "Inside Job"2) The title saying "Gates May Have Owned a Stake in Skype, Pressured MSFT to Buy"3) A subheading that reads "Gates may have guaranteed himself a payday at the cost of $8.5B USD from Microsoft"

There's nothing wrong with the title of the article, but the image and subheading clearly imply wrongdoing.

And he reveals that he orchestrated the acquisition, stating, "I was a strong proponent at the board level for the deal being done."

The quote does not in any way imply "orchestration". It implies agreement and support. To orchestrate or master-mind means he lead the efforts. Nothing in your article or referenced supports your claim of "orchestration".

Jason, whether you intended it or not, your editorial here clearly implies that he is guilty of some wrongdoing, though what wrongdoing is unclear. If, as you say, that was not your intent, then I would make some changes so that it more closely communicates what you desire us to interpret. As is, I don't know how anyone could read this without believing that you think he did something wrong...

Unless you've got reason to believe that he bought significantly more of Skype just before this deal went down, then I really don't think there's an issue here.

In fact, timing and disclosure looks to be the big difference between this and the David Sokol case. Sokol bought the stock in Lubrizol mere weeks before the Berkshire buyout and DAYS before he started advocating the buyout within Berkshire. (probably) big difference.

quote: Unless you've got reason to believe that he bought significantly more of Skype just before this deal went down, then I really don't think there's an issue here.

In fact, timing and disclosure looks to be the big difference between this and the David Sokol case. Sokol bought the stock in Lubrizol mere weeks before the Berkshire buyout and DAYS before he started advocating the buyout within Berkshire. (probably) big difference.

That's a valid point.

Granted the Skype partial acquisition by Silver Lake was in 2009, which Gates could in theory have played a role in. So it may be a little more recent than you suggest.

That said, I'm no legal expert, so I wouldn't begin to guess what the SEC would make of it if Gates did have a major stake acquired circa Sept. 2009, given that he pushed the current purchase.

But I agree the timing looks to be MORE in Gates favor than it was in Sokol's case....